Death and Taxes – And the New Tax Act Changes In Between

How does the recently passed tax reform law that takes effect this year affect my estate planning? Do I need to update it?

Dear Jonathan: How does the recently passed tax reform law that takes effect this year affect my estate planning? Do I need to update it?

Jonathan Says: In terms of estate planning, the Tax Cuts and Jobs Act (the “Act”) which was signed into law in December of 2017, primarily affects individuals with larger estates. Beginning this year, the estate tax exemption will double from the previously scheduled inflation-adjusted exemption amount of $5.6 million dollars to $11.2 million dollars per individual, or a combined $22.4 million dollars for a married couple. These increased exemptions are set to expire on December 31, 2025, unless Congress acts to extend them prior to that time.

By doubling the exemption amounts, fewer people will be subject to estate taxes when they die. Individuals will need to have an estate in excess of $11.2 million dollars and married couples will need to have an estate in excess of $22.4 million dollars before any estate taxes will need to be paid. The estate tax rate for amounts in excess of those exemption amounts was not changed by the Act and remains at 40%.

The annual gift tax exclusion this year will increase from $14,000 to $15,000 per person. This means that an individual can give away up to $15,000 and married couples can give away up to $30,000 per year per person without incurring any gift tax.

The Act did not change the “step up” in an asset’s income tax basis at death which provides that the basis of an asset when a person dies will be adjusted to that asset’s fair market value as of the date of the decedent’s death.

You did not provide any details as to the size of your estate or what type of estate planning you have in place, so I cannot provide you with a specific answer to your question. I recommend that you contact an estate planning attorney who can review your current estate plan and then make recommendations to you as to whether any changes should be made to your estate plan based on the Act or for any other reason. Good luck.

Dear Jonathan: My understanding is that the tax reform law did not repeal the estate tax and retained the “step up” in basis. What is this and why does it matter?

Jonathan Says: You are correct on both counts. Even though the estate tax was not repealed, as referenced in my answer to the first question, the exemptions were doubled to $11.2 million dollars for an individual and $22.4 million dollars for a married couple. The means that fewer people will be exposed to the estate tax going forward until at least December 31, 2025 when those exemptions are set to expire if Congress does not act to extend them prior to that time.

The “step up” in an asset’s basis refers to the stepping up of an asset’s income tax basis at death to its fair market value. This is best illustrated by an example: if a person’s home has an income tax basis of $100,000 but at that person’s death has a fair market value of $500,000, that home’s income tax basis will be adjusted or “stepped up” from $100,000 to $500,000.

Consequently, if the person’s heirs or beneficiaries sell the home for $500,000 after that person’s death, they will have no taxable gain to report. If the “step up” in an asset’s income tax basis was no longer available, the heirs or beneficiaries would have a taxable gain to report of $400,000 and a hefty capital gains tax to pay. So you can see, retaining the ability to “step up” an asset’s income tax basis at death was a huge win for the taxpayers.